The cost number that determines gross profit. COGS captures everything directly required to produce or deliver what was sold - the inputs that wouldn't exist without the sale.
Definition
COGS (Cost of Goods Sold) - the direct costs required to produce or deliver the products or services sold during a period. Raw materials, freight in, payment processing, direct production labor. Sometimes called Cost of Revenue or Cost of Sales.
Common uses
- Gross profit calculation - Revenue − COGS = Gross Profit
- Margin analysis - COGS ratio (as % of revenue) tracks product-level economics
- Pricing decisions - knowing direct cost per unit informs minimum viable pricing
Watch out
The line between COGS and overhead trips up most owners. Rule of thumb: if you stopped selling, the cost would mostly go away (COGS) or stay (overhead). Get this right; everything downstream depends on it.